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Khatija Haque - Head of MENA Research
Published Date: 07 April 2020
Japan’s PM Abe is expected to announce a state of emergency in some areas including Tokyo as the number of coronavirus cases continues to rise. The government is also finalising a stimulus package worth JPY 108trn (around 20% of GDP) to cushion the impact of the virus on the economy. In Europe, however, a number of governments have begun to take steps ease the lockdown restrictions imposed to contain the coronavirus pandemic. Austria has become the first country in the EU to set out a detailed timetable to of phased steps to normalise life and restart it’s economy. With small shops permitted to open from April 14th, slightly higher risk businesses such as hair salons from May 1st, and cafes and restaurants possibly reopening by mid-May. Denmark has followed suit. France, Spain, Belgium and Finland have set up expert task forces to look at the best way to begin winding down some of those containment measures, while avoiding a second wave of infections that could overwhelm health services.
Germany’s Chancellor Angela Merkel however adopted a more cautious tone, saying that while efforts to slow the spread of the virus where moving ahead, it was still too early to issue a timeframe for relaxing measures. German factory orders declined by a smaller than forecast -1.4% m/m in February but the data is likely to deteriorate in the March reading.
In the UK, PM Boris Johnson was admitted into the ICU as his condition deteriorated last night. The pound is trading weaker this morning on the news. The UK construction PMI fell by more than forecast to 39.3 in March, while consumer confidence fell to the lowest level since 2009.
India’s PMI reading for March showed a sharp decline. The Markit India services PMI dropped to 49.3 from previous month’s reading of 57.5 which dragged the composite PMI to 50.6 (versus 57.6 in February 2020). This was the first reading in contraction territory in five months for the services sector as the coronavirus outbreak hits demand. India is under complete lockdown until 15 April 2020. Markit, in its report, added that companies were reducing their workforce as businesses were not getting orders to maintain payroll numbers. The government and the central bank has announced initial measures to combat the slowdown and reports suggest that more measures will be announced soon to provide additional stimulus to businesses.
Source: Emirates NBD Research
Treasuries closed lower as risk assets rallied sharply. The curve steepened with yields on the 2y UST and 10y UST ending the day at 0.26% (+4 bps) and 0.66% (+7 bps) respectively. The New York Federal Reserve announced that its commercial paper purchases will start of 14 April 2020, part of an attempt to support the funding markets.
Regional bonds stayed flat despite positive global cues. The YTW on Bloomberg Barclays GCC Credit and High Yield index remained unchanged at 4.68% and credit spreads tightened slightly to 402 bps.
Fitch downgraded DP World to BBB and kept the rating on negative watch. The agency said it expects the company’s credit profile and metrics to be affected by a severe but relatively short-lived demand shock due to coronavirus. Further, there were unconfirmed reports that Dubai is in talks to raise funds, potentially through a bond issue.
Modest signs are being shown in Europe that pandemic curves are flattening, with Germany experiencing the lowest number of new coronavirus cases in a week. Whilst the EUR started the week in an upbeat mood it reversed its gains to hover around the 1.0800 mark. The news of Boris Johnson being move to the intensive care unit caused the pound to drop, hovering around 1.2250.
The dollar overall remains in a bullish mood and is slowly heading towards 101.00 on its DXY basis. USDJPY saw positive movement as risk appetite improved, trading comfortably above 109.00 but meeting resistance at 109.40, and is now back below 109.00. Japanese Prime Minister Shinzo Abe announced yet another relief package, equaling JPY108 trillion, just shy of USD1billion, which includes tax breaks and zero-interest loans. The AUD and NZD were the main winners of the day, increasing by over 1.40% and 0.90% respectively, reversing all the losses they experienced on Friday, with both the RBA and the RBNZ seen as unlikely to cut interest rates further as the RBA meets today.
Developed market equities rallied sharply amid indications that the lockdown measures in virus hotspots is helping to slow its spread. The S&P 500 index gained +7.0% while the Euro Stoxx 600 index added +3.7%.
Regional equities also benefitted from the broad risk-on sentiment. The DFM index and the Tadawul added +0.6% and +1.6% respectively. Emaar Properties rallied +4.7% after the company said it sold an 80% stake in its district cooling business in Downtown Dubai to Tabreed for AED 2.48bn. Tabreed gained +1.0%. Banking sector stocks remained under pressure following disclosures of their exposure to NMC. Saudi Aramco rallied +1.4% amid reports that Saudi Arabia and Russia are close to a deal to cut oil output.
Oil markets started the week on a softer footing as the focus remains on an OPEC+ meeting scheduled to take place on Thursday. While prices have rallied from recent lows they still remains at distressed levels, offering few economic benefits to producers like Saudi Arabia or Russia, and eviscerating the US shale patch. Brent futures fell more than 3% to settle just above USD 33/b, although most of the decline was due to a gap down start of the day—prices actually trended higher over much of the trading day. WTI showed a similar path but ended the day down almost 8%. Prices are nudging higher today as oil catches up with the risk-on rally that took equity markets and bond yields higher.
US consumption contracted sharply in April
More fiscal stimulus in Europe and Japan
Markets shrug off US-China tensions for now
Low inflation stalks the global economy